1.6
Chapter 1: Exercises
1.6
Chapter 1: Exercises
1.
Use Option Tutor's default data set for IBM prices to construct and graph
each of the following option trading strategies.
Suppose based upon your expectations of future market movements you hold
the following option positions. Evaluate
each strategy in terms of the following characteristics:
·
Expected
direction of market
·
Profit potential
·
Loss potential
·
Whether market
volatility is good for your position or hurts your position.
a)
Buy 10 IBM put options, with a strike price equal to 50.
b)
Buy 10 IBM put options, strike = 50
plus buy 10 IBM call options long, strike 50.
c)
Write 10 IBM call options, strike 45.
d)
Write 10 IBM call options, strike 65.
plus buy 10 IBM put options, strike 45.
e)
Buy 10 IBM call options, strike 45
plus write 10 IBM call options, strike 50
plus write 10 IBM call options, strike 55
plus buy 10 IBM call options, strike 60.
This
option trading strategy is called the “condor.”
When you graph this strategy you can see why.
f)
Write 10 put options, strike 65
plus buy 10 put options, strike 55
plus write 10 call options, strike 65
buy 10 call options, strike 55.
2.
Suppose you have the following assessment of the market:
·
Expected market
direction: Either up or down, but
more likely down.
·
Expected Market
Volatility: Very high.
Suppose
your risk characteristics are such that you would like limited loss potential
and large profit potential.
Construct
an option trading strategy that fits both your expectations and risk profile.
3.
Suppose you have the following assessment of the market:
·
Expected market
direction: neutral trend.
·
Expected Market
Volatility: very low
Suppose
your risk characteristics are such that you would like limited loss potential
and large profit potential.
Construct
an option trading strategy that fits both your expectations and risk profile.
4.
Explain the role of the clearinghouse in an options market.
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Financial Trading System